COMMODITY EXCHANGE, DIVERSIFICATION AND INVESTMENT IN NIGERIA

COMMODITY EXCHANGES SPUR DIVERSIFICATION AND NEW INVESTMENT WINDOWS IN NIGERIA

The prospective combined strength of Abuja and Lagos Commodity Exchanges excites investors’ interests, a phenomenon that will stimulate deployment of funds into commodities marked for aggregation into warehouses and siloes across the country.  Trading activities will be focused on Commodity Exchange contracts consisting of various trades; spots, forwards, futures and derivatives.  Financial returns will revolutionize agricultural and natural resource sectors of the Nigerian economy.  Understanding the procedures for investing on the Commodity Exchange platform stimulates investors’ desire to trade through the mechanism.
Forwards are aimed at taking risk positions that are speculative in nature.  Commodities traded on the Exchange are targeted while a Clearing House acts as intermediary that implements settlements arising from transactions.  Margin payment establishes commitments of buyers and sellers, participants taking long and short positions on specified commodities.  Physical contract implies availability of underlying commodity in the warehouse.  Delivery and physical possession are realised on presentation of Exchange “warrant” for determined quantity of the commodity held in defined warehouse.  Commodities include food, primary produce and industrial raw materials, mineral resources, precious and industrial metals.  Quality standards are specified for all traded commodities and weights of metals will be predetermined.  Settlement is denominated in a specified currency; US dollar, euro or Japanese yen.  Price per ton will be specified and delivery date is indicated.
The derivative market exists to secure price and standard of a commodity aimed for future delivery.  While not physical in nature, the derivative contract guarantees future availability of the commodity as may be specified in terms of quantity, quality and price.  Indeed futures contract stipulates locked price of a quantity of commodity for future delivery.  Long position relates to futures contract required for purchase or possession while short position implies sale of contract in determined future.  Options are expressions indicative of determination to buy or sell specified quantity of a commodity at specific future time. Call option occurs at the point of decision to take the buy offer while the put option represents the point of sale decision.  Hedging relates to speculative elements of derivative futures contracts.
Commodity Exchanges will target the following commodities that are abundant in Nigeria: beniseed, cashew nut, chillies, cocoa, coffee, cotton/lint/seed, garlic, ginger, Gum Arabic, kenaf, melon, palm kernel, rubber and sugar.
World Exchange traded commodities published by Nigerian Export Promotion Council include the following:
Oil seeds- soya, groundnut, cotton and seesame; oils- soya, palm kernel, sunflower, cotton, coconut, castor and groundnut; essential oils- garlic, ginger and lemon grass; feeds-soya meal, palm kernel cake, cotton meal, cobra meal, maize/corn and gluten; herbs/spices-chillies, pepper, ginger and garlic. The list includes cocoa, sugar, rubber, jute, sisal and coffee.
Source: Nigerian Export Promotion Council- Indicative World Commodities Price List as at Business Date: March 19^th 2004
All the 36 States including Federal Capital Territory, Abuja are endowed with deposits of diverse natural resources.  Most of the precious and industrial metals have high export potentials and are tradable on the Exchange.  Indeed the Commodity Exchange will promote transactions on monetary metals which consist the following: gold, silver, platinum and palladium.  Silver is also a highly valued industrial metal utilized for solar panels and in electronics.  Central Banks hold high levels of gold (bullion) reserves thereby impacting enormously on the price of the metal.  However rise in interest rates that strengthen currency results in fall of gold prices. On the contrary, investors confronting currency devaluation would opt to take trading positions on monetary metals.   
Produced by: Hammid Taju
26th December 2017